Meta’s ad rebound may depend too much on China

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Facebook, Instagram and WhatsApp may be banned in China. But that has not stopped the world’s second-biggest economy from being an important engine of growth for parent company Meta.

Meta’s decisions to pay its first-ever dividend and increase share buybacks by $50bn are certainly eye-catching. However investors — particularly those fuelling the stock’s 22 per cent rise on Friday — would do well to pay attention to the company’s ad revenue rebound and China’s role in it.

Politically, Meta is still in the hot seat. Financially, the Silicon Valley stalwart ended 2023 with a bang. It pulled in over $40bn in revenue during the fourth quarter, a 25 per cent increase from the year ago period. Aggressive cost-cutting — including the elimination of tens of thousands of jobs as part of Mark Zuckerberg’s plans for a “year of efficiency” — helped triple net income to $14bn. Full year revenue of $135bn was a new record.

Fuelling this growth is the rebound in advertising revenue. This took a tumble in 2022 after Apple made changes to its privacy policy and crimped the abilities of companies like Meta and Google to use personal data to sell targeted ads.

But spending has returned in 2023 as Meta used generative AI tools to boost the effectiveness of its ads. Advertising revenue rose 16 per cent to $132bn in 2023. Google’s parent company Alphabet also credited generative AI with the rebound in ad revenue last year. This rose 6 per cent to $238bn.  

One big difference between Meta and Alphabet is that China is having an outsized impact on the former’s growth. Meta said in an analyst call on Friday that China-based advertisers now account for 10 per cent of its annual revenue and contributed 5 percentage points to total worldwide revenue growth.

Meta did not specify who these advertisers were. But anyone who has used Facebook or Instagram recently would have been bombarded by ads from Temu and Shein in their feeds. 

The two online retailers, which offer shoppers cheap goods shipped from China, have been aggressively trying to expand their reach and compete with the likes of Amazon and Alibaba’s AliExpress in the US. Analysts at Goldman Sachs reckon Temu has spent $1.2bn on Meta advertising in 2023. Shein, which is pursuing an IPO in the US, is thought to have spent $200mn on Facebook and Instagram ads in the third quarter, according to analysts at JMP Securities.

These huge outlays are unsustainable. Meta, at nearly 25 times forward earnings, trades at a premium to Alphabet’s 21 times. This seems overdone given that Alphabet’s revenue base is more diversified, with 22 per cent coming from cloud services, subscriptions, platforms and devices. A China discount on Meta shares may be in order.